Interest rates remain below 6.5% for most home loans

We'll continue to enjoy affordable mortgages this spring, making it a good time for most of us to buy or refinance a home.

Over the past seven months, rates have moved up a little, then down a little, but the average cost of almost all types of mortgages has remained below 6.5% -- well below in most cases -- since mid-August.

It would be great if mortgages were as cheap as four years ago when rates bottomed out at 5.28%, the lowest they've ever been since Interest.com (and its print predecessors) began our weekly survey of major lenders in 1985.

But today's rates still compare very favorably to the 7% or 8% we were paying during the mid- to late-'90s, and the double-digit rates we were charged throughout the '80s and early '90s.

Anyone with even average credit can expect home loans to cost less than last spring and summer, when 30-year fixed-rate loans were climbing toward a peak of nearly 7% in late June.

Freddie Mac -- the government-chartered company that buys mortgages from lenders -- anticipates 30-year, fixed-rate loans will average 6.2% this year and 6.4% in 2008.

Our latest survey of major lenders taken April 11 found the average:

30-year, fixed-rate loan -- the most popular way to pay for a house -- costs 6.31%, down from an average of 6.6% last April.

15-year, fixed-rate loan costs 6.04%, two-tenths-of-a-point less than this time last year.

30-year jumbo loan (for more than $417,000) costs 6.58%, a little more than a tenth-of-a-point less.

That means you'd pay $620 a month for every $100,000 you borrowed with the average, 30-year, fixed-rate loan. Your payments would cost $19 a month less than for the same loan last April, and only $66 more than for the same loan in June 2003, when rates for those loans hit a record low of 5.28%.

The cost of adjustable-rate loans hasn't declined as much since last summer and they cost about the same, or even a little more, than last April. Our survey found an ARM with an initial rate guaranteed for:

Five years costs 6.17%, almost a tenth-of-a-point lower than a year ago.

One year costs 6.00%, a tenth-of-a-point higher.

That's why we think most borrowers should go with fixed-rate loans right now.

The initial monthly payments for the average five-year ARM would be $610 for every $100,000 you borrowed -- or just $10 a month less than for a 30-year fixed rate loan.

That isn't enough for most borrowers to risk higher rates, and higher mortgage payments, five years from now. Freddie Mac expects ARMs to account for only 11% of all loans this year, well below the historic average of 29% since 1985.

While low mortgage rates will keep homes affordable for most buyers, borrowers with poor credit are going to find it much more difficult to get a mortgage than it was this time last year.

Subprime loans, the high-interest mortgages taken out by borrowers with credit scores below 620, accounted for nearly one in five mortgages last year.

But lenders are making them harder to obtain after an alarming increase in the number of defaults and foreclosures. Applicants who would have had little trouble qualifying just a few months ago are being turned away because they don't make enough money, or have too much debt, to meet stringent new requirements.

Another big and very sudden change is that 100% financing has virtually disappeared for subprime borrowers. Last year about one out of every three subprime borrowers was given enough to cover the full purchase price of their homes. Now you'll need a down payment that covers at least 3%, if not 5% or more, of the price.

Bottom line: The Mortgage Bankers Association projects 30% fewer subprime loans will be made this year.

Home financing has become more affordable over the past nine months because the Federal Reserve Bank ended a two-year campaign to fight a worrisome spike in inflation by pushing interest rates higher.

Here's how it's all supposed to work:

The Fed acts as a kind of super bank, lending money to all the commercial banks we deal with everyday. So it begins charging those banks more to borrow money.

Those banks pass that cost along to us by raising rates on virtually every type of consumer loan from mortgages to credit cards. We respond by spending less, making it more difficult for everyone from furniture makers to hair stylists to raise prices.

Voila! Inflation is back under control.

Mortgage rates peaked at 6.93% in late June, just as the Federal Reserve pushed interest rates up for the 17th time in two years.

Home loans began to get less expensive in July when Fed Chairman Ben Bernanke told a Senate committee that all those rate hikes seemed to be working. We were spending less. The economy was slowing and inflation would surely follow.

Mortgage rates continued to decline after the Fed's rate-setting committee met in early August and, for the first time in more than two years, decided not to raise rates again.

The committee made similar decisions at its next five meetings after economic reports indicated Bernanke was right and inflation is indeed slowing.

The Consumer Price Index rose a modest 2.5% in 2006, well below the 3.4% increase in 2005.

As a result, we enjoyed affordable mortgage rates throughout the fall and winter and most economists expect that will continue for the foreseeable future.